Gaming acquisitions: Sony ‘vastly overpaid’ for Bungie, analyst says

Michael Pachter, Wedbush Securities Managing Director of Equity Research, joins Yahoo Finance Live to discuss several of the latest acquisitions in the video game space, including Microsoft and Sony, metaverse prospects for gaming, and who is better positioned to develop in the metaverse.

Video Transcript

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- Welcome back. Deal-making in the video game industry has been heating up from Microsoft's record deal to buy Activision Blizzard to Take-Two's acquisition of Zynga and now the New York Times deal to buy Wordle. Michael Pachter is Wedbush Securities managing director of equity research and he joins us now for more. Michael, thank you so much for joining us. And you have a new note breaking down all of these deals and more that have been taking place over the past month. But I'm wondering, what do you think really has been driving all of this M&A activity? And why now specifically?

MICHAEL PACHTER: Well, The Times for Wordle I think is just a nice fit with crossword puzzle but-- and it's a tiny deal, single-digit millions compared to multibillion for all the other ones. You know, I think Microsoft has a vision and a strategy. And they made a bold statement with their acquisition of Activision. And it fits their strategy.

Take-Two surprised us and explained it very well when they did it. But we didn't know that they wanted to be big in mobile, and they clearly do. And so they bought one of the two big public mobile companies, the other being Playtika. And they paid up for it. And Sony, I think, just did a me too statement and said, we're not going to be left behind. So we'll buy Bungie.

The Activision deal and the Zynga deal were both done below those stock's recent highs. So Activision had traded over 100, and the deal was at 95. Back in October, it was over 100. Zynga had traded over 11, I believe, and the deal was done at 986. So you know, they didn't really overpay, either of the acquirers. Bungie went for $4 million per developer. And most deals are between $250,000 and a million. I've seen deals as close, you know, as high as $2 million per developer. This is crazy talk.

And just to compare and contrast, EA bought Respawn about three or four years ago for $700 million with 400 developers. And those guys generate $700 million a year in revenue. Bungie does about $200 million in revenue. So I think Sony vastly overpaid. I think this was a statement that we're not going to let Microsoft get ahead of us, so we'll just buy something out of desperation. It's not really a deal that makes a whole lot of sense to me. The others do.

- Mike, how much of the acquisition fever in gaming is metaverse-driven? Or is there something else in the near term that these companies are going to have to rely on to bridge them to that point where the metaverse and the acquisitions that they've made are a reality in that immersive realm?

MICHAEL PACHTER: The two guys-- the two public company CEOs who talk the most about the metaverse are probably the two public company CEOs who know the least about the metaverse. So that's Mark Zuckerberg and Satya Nadella. If you actually read Phil Spencer's blog post-- Phil runs Xbox at Microsoft-- explaining the acquisition to Microsoft employees, the word metaverse didn't appear in about a four-page post. So nothing to do with metaverse if you're actually Phil who runs Xbox. Everything to do with metaverse if you're Satya Nadella who has no idea what metaverse is.

So truthfully, I think content is going to be the lead as the metaverse evolves much like games are the lead application on phones. But you don't buy phones to play games. You happen to use them to play games more than anything else. The metaverse is going to have tons and tons of content. That will be the hook. But the real opportunity in the metaverse is for brands to sell you goods that follow you anywhere you go and to advertise.

So I actually think Facebook's right to be getting into it. I don't think their approach is right. They have a walled garden. And I don't think they're going to let anybody in who comes in from outside. So I think they're going to fail. And I think Zuckerberg's vision is the metaverse is like Ready Player One, you know, put on your headset and live in a virtual-- virtual reality. That's not what it is. This is just an internet with no barriers and universal wallet.

Anything you buy you can take anywhere you go on the internet much like if you buy a pair of Nikes. You can wear them into a Puma store, and they won't kick you out. In the metaverse, you're going to put Nikes on your character in Fortnite and then wear them into World of Warcraft or whatever other game you play. And nobody is going to stop you. So I think knocking down walls is key. Microsoft may do that. I don't think that Facebook has a chance of doing that. And the metaverse, the real metaverse, is half a decade to a decade away.

- So Michael, I'm wondering, if not Microsoft and potentially not Facebook Meta, who do you think is best positioned right now to be taking the right approach to growing and becoming a leader in metaverse gaming?

MICHAEL PACHTER: OK, aside from pundits, Matthew Ball being a pundit who is easily the smartest guy on the planet on metaverse, the two company CEOs who know the most about the metaverse are Tim Sweeney at privately held Epic Games they make Fortnite. And they have the Unreal Engine. And he really is smarter than everybody else combined. And John Riccitiello at Unity. I think those two guys-- because they make game engines-- are going to provide the toolkit for creators to actually build a metaverse.

And I think that you'll get a Unity store module put in. You'll get a Unity Getty Images-like repository for NFTs. It could be on the blockchain, may be elsewhere. But Unity is going to tell game creators building anything you want to make portable anywhere, we'll provide the storefront, the universal wallet, the ability to-- to license your-- your creations or to sell them. And so Unity and Epic win. Epic isn't public yet. When it goes public, I think your viewers should strongly consider buying it. And Unity I just added to our best ideas list. I love that stock.

- All right, we'll leave it there for now. Michael Pachter is Wedbush Securities managing director of equity research. And we thank you so much for your time and your--